nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2008‒01‒26
thirteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Demographic Change, Human Capital and Endogenous Growth By Alexander Ludwig; Thomas Schelkle; Edgar Vogel
  2. Forming Priors for DSGE Models (and How it Affects the Assessment of Nominal Rigidities) By Marco Del Negro; Frank Schorfheide
  3. Country Portfolio Dynamics By Michael B. Devereux; Alan Sutherland
  4. Solving for Country Portfolios in Open Economy Macro Models By Michael B. Devereux; Alan Sutherland
  5. Establishments dynamics and matching frictions in classical competitive equilibrium By Marcelo Veracierto
  6. An Estimated DSGE Model for Monetary Policy analysis in Low-Income Countries By Shanaka J. Peiris; Magnus Saxegaard
  7. First-time home buyers and residential investment volatility By Jonas D. M. Fisher; Martin Gervais
  8. Implementing the Friedman Rule by a Government Loan Program:<br> An Overlapping Generations Model By Benjamin Eden
  9. The spending and debt responses to minimum wage increases By Daniel Aaronson; Sumit Agarwal; Eric French
  10. Substitution, Risk Aversion and Asset Prices: An Expected Utility Approach By Benjamin Eden
  11. High Growth and Low Consumption in East Asia: How to Improve Welfare While Avoiding Financial Failures By Céline Rochon; Maral Shamloo; Andrew Feltenstein
  12. The aggregate labor market effects of the Swedish knowledge lift program By Albrecht, James; van den Berg, Gerard J; Vroman, Susan
  13. Financial Globalization and Monetary Policy By Michael B. Devereux; Alan Sutherland

  1. By: Alexander Ludwig; Thomas Schelkle; Edgar Vogel (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: This paper employs a large scale overlapping generations (OLG) model with endogenous education to evaluate the quantitative role of human capital adjustments for the economic consequences of demographic change. We find that endogenous human capital formation is an important adjustment mechanism which substantially mitigates the macroeconomic impact of demographic change. Welfare gains from demographic change for newborn households are approximately three times higher when households endogenously adjust their education. Low ability agents experience higher welfare gains. Endogenous growth through human capital formation is found to increase the long-run growth rate in the economy by 0.2-0.4 percentage points.
    Date: 2007–10–19
  2. By: Marco Del Negro; Frank Schorfheide
    Abstract: The paper discusses prior elicitation for the parameters of dynamic stochastic general equilibrium (DSGE) models, and provides a method for constructing prior distributions for a subset of these parameters from beliefs about the moments of the endogenous variables. The empirical application studies the role of price and wage rigidities in a New Keynesian DSGE model and finds that standard macro time series cannot discriminate among theories that differ in the quantitative importance of nominal frictions.
    JEL: C11 C32 E3
    Date: 2008–01
  3. By: Michael B. Devereux; Alan Sutherland
    Abstract: This paper presents a general approximation method for characterizing time-varying equilibrium portfolios in a two-country dynamic general equilibrium model. the method can be easily adapted to most dynamic general equilibrium models, it applies to environments in which markets are complete or incomplete, and it can be used for models of any dimension. Moreover, the approximation provides simple, easily interpretable closed form solutions for the dynamics of equilibrium portfolios.
    Keywords: Bonds , International bond markets ,
    Date: 2007–12–19
  4. By: Michael B. Devereux; Alan Sutherland
    Abstract: This paper presents a general approximation method for characterizing time-varying equilibrium portfolios in a two-country dynamic general equilibrium model. the method can be easily adapted to most dynamic general equilibrium models, it applies to environments in which markets are complete or incomplete, and it can be used for models of any dimension. Moreover, the approximation provides simple, easily interpretable closed form solutions for the dynamics of equilibrium portfolios.
    Keywords: Payments imbalances , Markets , Trade , Bonds ,
    Date: 2007–12–19
  5. By: Marcelo Veracierto
    Abstract: This paper develops a Walrasian equilibrium theory of establishment level dynamics and matching frictions and uses it to evaluate the effects of congestion externalities in the matching process and determine the government interventions that are needed to implement a Pareto optimal allocation. The optimal policy, which involves a tax on the creation of help-wanted ads and an unemployment subsidy, is highly contractionary. However, it leads to large welfare gains. The policy also plays an important role in dampening the response of the economy to aggregate productivity shocks.
    Date: 2007
  6. By: Shanaka J. Peiris; Magnus Saxegaard
    Abstract: This paper evaluates monetary policy-tradeoffs in low-income countries using a dynamic stochastic general equilibrium (DSGE) model estimated on data for Mozambique taking into account the sources of major exogenous shocks, and level of financial development. To our knowledge this is a first attempt at estimating a DSGE model for Sub-Saharan Africa excluding South Africa. Our simulations suggests that a exchange rate peg is significantly less successful than inflation targeting at stabilizing the real economy due to higher interest rate volatility, as in the literature for industrial countries and emerging markets.
    Keywords: Monetary policy , Africa , Currency pegs , Inflation targeting , Low-income developing countries ,
    Date: 2007–12–19
  7. By: Jonas D. M. Fisher; Martin Gervais
    Abstract: Like other macroeconomic variables, residential investment has become much less volatile since the mid-1980s (recent experience notwithstanding.) This paper explores the role of structural change in this decline. Since the the early 1980s there have been many changes in the underlying structure of the economy, including those in the mortgage market which have made it easier to acquire a home. We examine how these changes affect residential investment volatility in a life-cycle model consistent with micro evidence on housing choices. We find that a decline in the rate of household formation, increased delay in marriage, and an increase in the cross-sectional variance of earnings drive the decline in volatility. Our findings provide support for the view that the “Great Moderation” in aggregate fluctuations is not just due to smaller aggregate shocks, but is driven at least in part by structural change.
    Date: 2007
  8. By: Benjamin Eden (Department of Economics, Vanderbilt University)
    Abstract: The welfare gains from adopting a zero nominal interest policy depend on the implementation details. Here I argue that implementing the Friedman rule by a government loan program may be better than implementing it by collecting taxes, even when lump sum taxes are possible. The government loan program will crowd out lending and borrowing and other money substitutes. Since money can be costlessly created the resources spent on creating money substitutes are a "social waste". Moving from an economy with strictly positive nominal interest rate to an economy with zero nominal interest rate will increase consumption by the amount of resources spent on lending and borrowing. But in general welfare will increase by more than that because consumption smoothing is better under zero nominal interest rate.
    Keywords: Government loans, welfare cost of inflation, money substitutes, wealth redistribution, Friedman rule
    JEL: E42 E52 E51 E58 H20 H21 H26
    Date: 2008–01
  9. By: Daniel Aaronson; Sumit Agarwal; Eric French
    Abstract: This paper presents evidence that spending increases more than income, and thus debt rises, in households with minimum wage workers following a minimum wage hike. Furthermore, we show that the size, timing, persistence, and composition of spending is inconsistent with the basic certainty equivalent life cycle model as well as simple “rule of thumb” models where consumption is equal to a fraction of current income. However, our findings are consistent with a model where households can borrow against part of the value of their durable goods. We obtain these results from four different datasets – the Consumer Expenditure Survey, Survey of Income and Program Participation, Current Population Survey, and administrative bank and credit bureau records. ; PRELIMINARY AND INCOMPLETE
    Date: 2008
  10. By: Benjamin Eden (Department of Economics, Vanderbilt University)
    Abstract: The standard power utility function is widely used to explain asset prices. It assumes that the coefficient of relative risk aversion is the inverse of the elasticity of substitution. Here I use the Kihlstrom and Mirman (1974) expected utility approach to relax this assumption. I use time consistent preferences that lead to time consistent plans. In our examples, the past does not matter much for current portfolio decisions. The risk aversion parameter can be inferred from experiments and introspections about bets in terms of permanent consumption (wealth). Evidence about the change in the attitude towards bets over the life cycle may also restrict the value of the risk aversion parameter. Monotonic transformations of the standard power utility function do not change the predictions about asset prices by much. Both the elasticity of substitution and risk aversion play a role in determining the equity premium.
    Keywords: Consumption smoothing, intertemporal elasticity of substitution, risk aversion, asset prices, equity premium <br><br>
    JEL: D11 D81 D91 G12
    Date: 2008–01
  11. By: Céline Rochon; Maral Shamloo; Andrew Feltenstein
    Abstract: This paper analyzes certain policies that are typical of a number of rapidly growing East Asian countries in which a fixed exchange rate, combined with a surplus labor market, has made domestic assets relatively inexpensive, generating high rates of FDI as well as domestic capital formation. This "investment hunger" can lead to unanticipated declines in the returns to investment, and resulting financial insolvencies. Private consumption remains low and there are concerns that high savings rates cannot be sustained. We construct a dynamic general equilibrium model and apply it to a stylized Asian economy, loosely based upon China. We calibrate a benchmark equilibrium, and carry out various counterfactual simulations to analyze alternative policies, in particular tax cuts and exchange rate revaluations, as instruments in increasing private consumption while avoiding bank failures.
    Keywords: Economic growth , China, People's Republic of , Consumption , Financial crisis , Exchange rates , Labor markets ,
    Date: 2007–12–18
  12. By: Albrecht, James (Department of Economics, Georgetown University); van den Berg, Gerard J (IFAU - Institute for Labour Market Policy Evaluation); Vroman, Susan (Department of Economics, Georgetown University)
    Abstract: The Swedish adult education program known as the Knowledge Lift (1997-2002) was unprecedented in its size and scope, aiming to raise the skill level of large numbers of low-skill workers. This paper evaluates the potential effects of this program on aggregate labor market outcomes. This is done by calibrating an equilibrium search model with heterogeneous worker skills using pre-program data and then forecasting the program impacts. Our calibrations suggest that the equilibrium treatment effects were positive - wages are predicted to increase, as are the employment rates of the treated. The equilibrium effects magnify the partial effects by a factor 1.5 to 2. This is due to the increase in demand for skills that is triggered by the increase in its supply.
    Keywords: Job search; policy evaluation; wages; unemployment; Swedish labor market; calibration; adult education; equilibrium effects
    JEL: I21
    Date: 2007–12–20
  13. By: Michael B. Devereux; Alan Sutherland
    Abstract: What does financial globalization imply for the design of monetary policy? Does the case for price stability change in an environment of large cross country gross asset holdings?. This paper is concerned with the effects of monetary policy under endogenous international portfolio choice and incomplete markets. With endogenous portfolios, monetary policy takes on new importance due to its impact on the distribution of returns on nominal assets. Surprisingly, we find an even stronger case for price stability in this environment. Even without nominal rigidities, price stability has a welfare benefit by enhancing the risk sharing capacity of nominal bond returns.
    Keywords: Globalization , Monetary policy , Capital flows , Exchange rate instability , International capital markets ,
    Date: 2007–12–19

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